Cerner Writes a Prescription for the Health-Care System

By

Lawrence C. Strauss

Updated May 24, 2009 12:01 a.m. ET

Cerner, a health-care information-technology company, has been a big hit with investors lately.

Its shares have climbed more than 50% since early March. A big reason for that has been the $787 billion federal stimulus package, which includes billions of dollars of incentives to encourage more widespread use of electronic medical records and other health-care IT.

ENLARGE

While Cerner'sCERN-0.33% shares, now in the mid-$50s, look a little pricey based on this year's expected earnings, bulls argue that there's more upside as gaping holes in health-care information technology start to get filled nationally. Some fans of the stock see it rising as much as 40% over the next year.

The goal of the electronic-records provisions is to make the sprawling U.S. health-care system more efficient, less costly -- and safer. Besides incentives for wider use of electronic records, the stimulus package penalizes providers that don't make the effort.

Spending on health care is projected to top $2.5 trillion this year, or 17.6% of gross domestic product, according to the Centers for Medicare and Medicaid Services. A 2005 Rand Corp. study concluded that "if most hospitals and doctors' offices adopted [health-care IT], the potential savings for both inpatient and outpatient care could average over $77 billion per year."

Many health-care providers have adopted clinical information technology slowly, due to its considerable expense and to resistance from doctors reluctant to abandon familiar paper records, like the bedside charts often used to track hospitalized patients' conditions. Electronic billing systems are common. But in hospitals big IT gaps remain, notably for computerized clinical-order entry and electronic medical records.

Cerner has a solid presence in both categories, generating about 15% of its revenue from selling licensed software for those applications. Another area of growth is its "hosting" business, in which Cerner runs information-technology systems for clients from its data centers in Kansas City.

Cerner had a decent first quarter, although it was hurt by hospitals' slashing capital spending. For the full year, Cerner is expected to earn $2.41 a share, up from $2.19 a share in 2008.

While cautious investors may want to wait for a selloff of 5% or 10% before buying, Cerner should have a clean bill of health for years.

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